Chidambaram Says People Gamed The System After Note Ban
Government didn’t think through demonetisation loopholes, Chidambaram says
Most people with hoards of black money converted it into white in the first thirty days of demonetisation making the exercise a failure, said former finance minister P Chidambaram in a telephonic interaction with BloombergQuint.
“They (government) didn't think through the loopholes that would be discovered by clever people,” said Chidambaram, adding that the idea and design behind demonetisation was flawed.
On Wednesday, the Reserve Bank of India released data which showed that 99 percent of the currency that was demonetised had returned into the banking system.
Finance Minister Arun Jaitley tried to defend the government’s position contending that detection of black money was not the sole purpose of demonetisation and that curbing terrorism funding and counterfeiting were other key goals. He argued that demonetisation had forced all the cash in the informal economy to be deposited in banks, which will now be subject to scrutiny by the tax department.
Chidambaram said he will wait to see the results before he concurs with Jaitley’s comments. Detection of black money is only the first step after which it has to go through a process of adjudication that takes seven to eight to ten years, he explained.
"Only then will we know how much of the so-called undetected income is in the tax net", he said, adding that it would be premature to consider the detected amount as taxed.
Here are edited excerpts from the conversation.
What was the point of the whole exercise if it didn’t manage to extinguish any of the black money?
There was no point at all. It was a completely misguided adventure. And as we have said from the very beginning, this will end up in an utter fiasco.
Do we need to get into that blame game right now, as to who was responsible and should they in some way justify the decision?
See, the facts are on the table. It was, in fact, a government decision. They tried to disguise it by writing a letter on November 7, 2016. RBI hurriedly called a truncated meeting of the board of governors of RBI, and took a decision without any research paper, without any background note, and recommended demonetisation of Rs 500 notes and Rs 1,000 notes. The government promptly announced it at 8 o’ clock. Is this the way a major decision which has a major impact on the economy should be taken?
RBI certainly did not cover itself with glory, therefore I said shame on RBI for ‘recommending demonetisation’. I know they did not recommend it. But on record, it appears that they have recommended.
What did you think went wrong? Did people out there just game the system and find ways to convert this money to white? Could this have been avoided at any stage? Do you think demonetisation as an idea was fated to fail?
The idea was wrong. The design was wrong. They didn’t think through what loopholes will be discovered by clever people. In the first 30 days, according to what I gather, most people who had hordes of black money, converted their black money into white. The people who actually suffered were the average people - the middle class and lower middle class - who had a small number of demonetised notes and went through a torturous process to convert them. The design itself was wrong and therefore people easily gamed the system.
The government said that all of this money which was in the informal system has now come into the formal net. They are examining suspicious transactions and deposits and they may still be able to impound this money via various taxes. Do you buy that?
I’ll believe it when I see the results. The government has said that it has detected undisclosed income of about Rs 15,000 odd crore. But that’s part of the process. We hear the income tax department through researches, surveys, seizures, detected allegedly undisclosed income. But that has to go through a process of adjudication. There is an assessment, there is an appeal, there is a further appeal to the tribunal, there is a further appeals to the high court. It’s only when the matter is adjudicated, which will take 7-10 years, will we know how much of the so-called undetected income has been detected.